The American Opportunity Tax Credit may be one of the most favorable tax credits to college students ever written into law. The American Opportunity Tax Credit came to existence as part of the 2009 economic stimulus package.

The benefits are quite obvious from first glance. The American Opportunity tax credit is:

Up to 40% refundable – This tax credit not only reduces the amount of income tax paid; students (or their parents) also receive up to $1,000 back in cold hard cash in excess of their tax burden.

Available to most everyone – The tax credit works very much like other college-related tax benefits. Phase out begins at $80,000 for singles and $160,000 for married couples. This is similar to the phase out for deducting student loan interest.

Worth as much as $2,500 – This tax credit allows for students or their parents to receive up to 100% of their college expenses (up to $2,500) back in the form of a tax credit.

Making Community College Free

Obama’s original plan was to make community college free for most every American. He might have done just that. Given that this tax credit is available for people who attend school at least half-time, there is plenty of opportunity to minimize education costs at the expense of Uncle Sam.

Students who aren’t entirely committed to their college experience get the best of both worlds. First, the AMOTC allows students who have not yet completed a 4-year program to collect on the tax credit for every year they qualify. Second, the poorly-written code allows for slowpokes to really rake the system for all its worth.

So let’s think about how one might use this to their advantage:

Go to community college. At $100 per credit hour at a local community college, students should expect an annual out of pocket cost of $1200 per year, plus books (which we’ll guestimate to cost $600).

Extend your stay by attending only part-time. As written, the tax credit calculates your years in school based on school years – freshman, sophomore, junior, and senior years – not based on the calendar. Thus, a student who takes 8 years to complete a 4-year degree receives far more in benefits than someone who speeds along.

Bank on Big Government. The American Opportunity Tax Credit was supposed to be a two-year venture. Then it was extended for two more years in 2011. There’s a very good chance that this program will be extended indefinitely. It would be political suicide to attack a tax credit (raising taxes!) that affects mostly the middle class and is directly related to education. This tax credit will exist as long as the United States does.

Veterans get extra benefits. Those who have served their country are eligible for all the aforementioned discounts and more. Some schools, such as Vista College Military, provide vets with a number of scholarships that can make education affordable. Spouses and dependents will receive a 17% discount on tuition, veterans are awarded with a 25% discount, and those who are active duty receive a 45% tuition discount. Members of Vista College are also given lifetime career services assistance, making the school an excellent choice for those who are recently adjusting to the civilian lifestyle.

As both tuition and books are free game for this credit, a student who attends a two-year school part-time likely won’t pay much more than $1,800-$2,000 in expenses, all of which fits under the limits of the program.

Pending that the student’s parents are under phase out for annual income, and pay anywhere between $800 and $1000 in taxes, they’ll be getting all of junior’s expenses back from Uncle Sam following Tax prep. For those who pay no federal taxes, the deal is really just as sweet – a whopping $1,000 of the AMOTC is refundable.

You do not have to pay any taxes to receive 40% of this particular tax credit. How great is that?

The Best Money Spent

This tax credit just keeps getting better and better. There’s another detail of which students should be made aware – certifications, associates, and bachelor degrees are all treated equally.

Want to go to school to learn a new trade? You can use the American Opportunity Tax Credit. (This is a big boon for trades like welding, where incomes are quite high relative to the time invested for a certification.) Likewise, you can use it for certifications in other concentrations – cosmetology, anyone? This law does not discriminate. So long as you’re seeking a certification, or any degree in any field, you qualify.

As a general rule of thumb, tuition and expenses paid to attend a school that is eligible for federal student loans and grants is perfectly fine.

While doing the community college thing isn’t exactly “living the dream” for a highschool kid, it sure saves a heck of a lot of money – and beggers can’t be choosers these days; not everyone’s parents can afford the 6-7% tuition increase we’ve seen compounding for years in private and state schools. So, I work with a few successful professionals that did 2 years in community, transferred to good state schools, and landed a job with that Penn State/Rutgers, etc. degree. The one that you see on the resume is the graduating diploma, not necessarily where you spent your first two years. I hope to put my kids through 4 years of the best college they can get into, but if that’s not a realistic option, this one sure beats a lifetime of debt!

In some cases it works out even better. My grades in my prerequisite classes are terrible. However, those classes I’m taking at a community college. When they’re transferred to the 4-year school, the 4-year accepts them as pass-fail. Basically, the only grades I’ll have on my records from my 4-year school are my finance grades, which are all As. Works out pretty darn well.

I did community college back in CA in the good ol’ days when tuition was $11/hour. I transferred out to a 4-year school after picking up my AA. That saved me about $35k or so. Nothing wrong with a nice community college degree to take care of those darn GE requirements.

I’m doing the same. I go to a community college and a four-year school at the same time. The worst part of going to community college is that everyone will immediately assume you’re stupid. That’s fine by me, though.

I have enjoyed two different college tax credits for the past four years. It was a sweet payout after having to dish up boat loads for my education. I am truly going to miss this tax credit next year, as my return will be cut in half next year.